Question

What is the minimum annual salary required by Dennis in order to purchase a $199,000 home with 20% down?

Note: The bankers' rule of thumb for mortgages is 2.5 times the annual salary.

$76,600
$63,680
$71,600
$99,500

Answer 1

To determine the minimum annual salary required by Dennis to purchase a $199,000 home with a 20% down payment, we can use the bankers' rule of thumb, which states that the home price should be no more than 2.5 times the annual salary.

First, let's calculate the down payment:
- Price of the home: $199,000
- Down payment (20%): 0.20 x $199,000 = $39,800

Next, we can find the mortgage amount:
- Mortgage amount = Home price - Down payment
- Mortgage amount = $199,000 - $39,800 = $159,200

According to the bankers' rule of thumb, we can set up the following equation:
\[ \text{Home price} = 2.5 \times \text{Annual salary} \]
So,
\[ 199,000 = 2.5 \times \text{Annual salary} \]

Now, we can solve for the annual salary:
\[ \text{Annual salary} = \frac{199,000}{2.5} \]
\[ \text{Annual salary} = 79,600 \]

Now, considering the salary options provided, we can see that $79,600 is not among the given options. However, the closest option that is greater than or equal to the required salary is required to ensure that Dennis can actually afford the home.

The minimum annual salary from the provided options is:
**$76,600**

This option is the most reasonable choice from the list, considering it is the highest and closest to the calculated requirement.